On pragmatist institutional economics
Yefimov, Vladimir
Independent researcher
June 2004
Online at https://mpra.ub.uni-muenchen.de/49016/
MPRA Paper No. 49016, posted 11 Aug 2013 17:13 UTC
On pragmatist institutional economics
Vladimir Yefimov
The movement of New Institutional Economics – NIE - (Furubotn and Richter, 1998; Ménard, 2000), born in the seventies, followed the Institutional Economics of John R. Commons (1934a) by putting the notion of ‘transaction’ in the centre of its study. The seventies were a period of appearance of an absolute authority of neoclassical economics with its hypothetico-deductive (Cartesian and positivist) methodology and the NIE followed this methodology. Most of the participants of this movement believed that their field could just be an extension of the mainstream economics and that they could use similar quantitative techniques. The NIE was assimilated by many of the members of its community to ‘transaction costs economics’. In this way they have distorted totally the initial design of Commons’ institutional economics who saw the transaction as a unit of activity common to law, economics and ethics (Commons, 1932).
Instead of Cartesian analytic philosophy, which is the philosophical foundation of neoclassical economic theory, he based his institutional economics on pragmatist philosophy of Charles S.
Peirce and John Dewey. As Philip Mirowski has noted “these two traditions have a profound conflict over their respective images of a ‘science’, and therefore profoundly incompatible images of ‘economic man’ and ‘rationality’” (Mirowski, 1987). Commons used the pragmatism as a model of human behaviour and as a method of research. If the former becomes more and more popular, the latter is ignored or rejected by the majority of modern institutionalists, either advocates of new or old institutional economics. It happens because at present the hypothetico- deductive thinking dominates almost the totality of the community of academic economists.
Social science thought flows based on Pragmatism, Institutionalism in economics and Chicago school in sociology (Thomas and Znaniecki, 1926), were very influential in the United States between two wars. Later their influence fell and empirical research in economics based on pragmatism almost disappeared. Beginning from the second half of the 20th century the American Institutionalism only attracted the attention of historians of economic thought and specialists in economic methodology. Some of them made an outstanding contribution to the understanding of its pragmatist nature [(Ramstad, 1986), (Mirowski, 1987), (Bush, 1993), (Corei, 1995), (Bazzoli, 1999)], but many others did not share pragmatist views of Commons.
They concentrated on developing theoretical notions using as main references writings of founders (Veblen, Commons, Mitchell). Geoffrey Hodgson, one of the leaders of this stream, has taken a militant anti-empiricist position by declaring that empirical evidence has only residual importance in economic research (Hodgson, 1988). Most of modern advocates of old institutional economics are out of touch of real economic problems and empirically oriented Commons is criticised as a poor theorist (Hodgson, 2003). Most members of this community are not doing any empirical studies themselves and even their theoretical considerations usually appeal exclusively to theoretical considerations of others and not to any results of empirical studies.
Many modern institutional economists criticise Old Institutional Economics for its descriptive character and lack of rigorous and systematic theory. Pragmatically oriented sociologists developed a method called Grounded Theory (Glaser and Straus, 1967; Strauss and Corbin, 1998; Locke, 2001), which reconciles description and theorising. Empirical research in the framework of this method is used not to test theories or hypotheses created before its start but to
E-mail : vladimir.yefimov@wanadoo.fr
create concepts, theories and hypotheses deeply rooted in the collected data. Grounded Theory is the most sophisticated method entering the set of pragmatically oriented social research methods called Qualitative Research (Denzin and Lincoln, 2000; Poupart et al., 1997). One of them is case study method, another one is a method of field experiments called Action Research (Greenwood and Levin, 1998; Stringer, 1999; Reason and Bradbury, 2001) which has large applications in the study of organisations. Pragmatist economic laboratory experiments based on gaming-simulation (Greenblat and Duke, 1975; Yefimov, 1981) could oppose neoclassical experimental economics. Grounded Theory, Action Research as Qualitative Research in general and laboratory gaming-simulation experiments can be used for economic research. The aim of this paper is to attract the attention of economists to the tremendous unused potential of the application of pragmatist methodology. The paper discusses the pragmatist methodology and techniques from an institutional economist point of view. The paper is based on a personal experience of the author in application of these methodology and techniques for economic institutional investigations (Yefimov, 1988, 1997, 2003).
1. Pragmatism versus Cartesianism and positivism
Descartes was very suspicious to results of observations. He was sure that the senses deceive us and all the things that we see are false. He appealed to doubt in everything. At the same time he was convinced that where the senses fail, the mind triumphs. It influenced very negatively a vision of science: “Cartesianism destroyed the balance which underlies true science: the balance between thinking and observing, deduction and induction, imagination and common sense, reflection and action, reason and passion, abstract thinking and realism, the world within and the world without the mind. Under the impact of Cartesianism the second element of the equation was sacrificed to the first [...] Descartes’ epistemological reflections opened an era of axiomatic, unhistorical, deductive thinking broadly called the Enlightenment.” (Mini, 1994, p. 39) The Cartesian dualism with its separation of knowing from doing, object from subject, fact from value, theory from practice serves an epistemological foundation for neoclassical economics (Bush, 1993, p. 65).
The founder of Pragmatism, Charles S. Peirce, understood the historical context of appearance of Cartesianism. Descartes revolted against authority as the ultimate source of truth and allowed theoretically scepticism. Afterwards “that done, he sought a more natural fountain of true principles, and professed to find it in the human mind.” (Peirce, 1878, p. 125) In this way, he underestimated the role of observation by overestimating the role of human thinking. According to Peirce, we cannot doubt in everything: “A person may, it is true, in the course of his studies, find reason to doubt what he began by believing; but in that case he doubts because he has a positive reason for it, and not on account of the Cartesian maxim” (Ibid., pp. 28, 29). Peirce estimated that “machinery of the mind can only transform knowledge, but never originate it, unless it be fed with facts of observation. Nothing new can ever be learned by analysing definitions” (Ibid., p.126). He has noticed that scholars are “less intent on finding out what the facts are, than on inquiring what belief is most in harmony with their system. It is hard to convince a follower of the a priori method by adducing facts” (Ibid., p.138).
One of the central notions of Peircian philosophy is that of belief : “Our beliefs guide our desires and shape our actions (…) Doubt is an uneasy and dissatisfied state from which we struggle to free ourselves and pass into the state of belief; while the latter is a calm and satisfactory state which we do not wish to avoid, or to change to a belief in anything else (…) Both doubt and belief have positive effects upon us, though very different ones. Belief does not make us act at once, but puts us into such a condition that we shall behave in a certain way, when the occasion arises. Doubt has not the least effect of this sort, but stimulates us to action until it is destroyed (…) The irritation of doubt causes a struggle to attain a state of belief. I shall term this struggle
inquiry (…) That the settlement of opinion is the sole end of inquiry is a very important proposition. It sweeps away, at once, various vague and erroneous conceptions of proof” (Peirce, 1877, pp. 114, 115).
Another notion of this philosophy closely linked with the notion of belief is that of habit. The belief “involves the establishment in our nature of a rule of action, or, say for short a habit (…) The whole function of thought is to produce habits of action. (…) To develop its meaning, we have, therefore, simply to determine what habits it involves” (Peirce, 1878, pp. 129, 131). For Peirce “belief is not a momentary mode of consciousness; it is a habit of mind essentially enduring for some time (…) Instead of saying that you want to know the ‘Truth’, you were simply to say that you want to attain a state of belief unassailable by doubt” (Peirce, 1905, p.
336). Based on the Peirce’s Pragmatism, we can say that social reality is a reality of beliefs and habits. It means that this reality is socially constructed1 by the processes of institutionalisation2, legitimation3 and socialisation4 (Berger and Luckman, 1991). The social reality is historical:
“Institutions can not be created instantaneously. Institutions always have a history, of which they are the products. It is impossible to understand an institution adequately without an understanding of the historical process in which it was produced” (Ibid., p.72).
Peirce saw the research as a collective action of investigators who, by observing and by analysing something separately, gradually converge on the results of investigation. “The opinion which is fated to be ultimately agreed to by all who investigate, is what we mean by the truth, and the object represented in this opinion is the real. That is way I would explain reality” (Peirce, 1878, p. 139). In this way, the “Cartesianism’s guiding notion of the solitary doubting ego is supplanted by the idea of a co-operative search for truth for the purpose of coping with real problems encountered in the course of action” (Joas, 1993, p.19). The consequences of this transformation of the guiding idea of philosophical reflection are extremely far-reaching:
“Indeed, the entire relationship between cognition and reality is changed. The concept of truth no longer expresses a correct representation of reality in cognition, which can be conceived of using the metaphor of a copy, rather, it expresses an increase of the power to act in relation to an environment. All stages of cognition, from sensory perception through to the logical drawing of conclusions and on self-reflection, must be conceived anew” (Joas, 1993, pp.19, 20).
The selective character of the perception shown, by a follower of Peirce (William James5), became evidence. Since then, psychologists made a significant progress in understanding of human cognition. The perceptual process includes the selection of a stimulus for attention, its organisation into a meaningful pattern and an interpretation of the significance of the stimulus.
Language plays an important role in perception shaping (Martin, 2001, pp. 79 - 87). Several types of perceptual errors are possible and among them is the so-called perceptual defence, which “provides a measure of protection against information, ideas that are threatening to an existing perception or viewpoint. It is a process that encourages the perception of stimuli in
1 Even Douglass North accepted it: “All the building blocks of the world we live in are a product of our human mind. They do not exist outside us.” (North, 2003, p.3)
2 “Institutionalization occurs whenever there is a reciprocal typification of habitualized actions by types of actors.
Put differently, any such typification is an institution.” (Berger and Luckman, 1991, p.72)
3 “The institutional world requires legitimation, that is ways by which it can be ‘explained and justified.” (Berger and Luckman, 1991, p.79)
4 Socialisation may be defined as the comprehensive and consistent induction of an individual into the objective world of a society or a sector of it. It happens when the individual achieves a capacity of the immediate apprehension or interpretation of an objective event as expressing meaning. (Berger and Luckman, 1991, pp.149, 150)
5 “Everyone knows what attention is. It is the taking possession of the mind, in clear and vivid form, of one out of what seem several simultaneously possible objects or trains of thought. Focalisation, concentration, of consciousness are of its essence. It implies withdrawal from some things in order to deal effectively with others.” (James, 1890, pp. 403 – 404)
terms of the known and familiar.” (Martin, 2001, p. 93) It is perceptions that determine to a large extent the behaviour of actors. In this sense, the social reality, a reality of actions based on beliefs and habits, is subjective.
Mechanism of perception and knowledge acquisition is conceived in modern cognition science as a process of categorisation: “The categories we construct and employ to structure the world can be construed as entities deeply imbued with our own experiences as human agents;
sometimes they may be heavily constrained by the properties of the real world, at other times the correspondence may be highly metaphorical. As we have not been afforded a privileged or God- like insight into the properties of the real world, we have no independent means of knowing exactly which is which” (Wilkes, 1997, p.77). There exist actually two approaches to categories:
similarity-based and explanation-based: “The similarity-based view holds that instances of a category are represented mentally by the degree to which they are similar to other known instances of the category. The explanation-based view, on the other hand, argues that instances of a category are related by an explanatory structure” (Sternberg and Ben-Zeev, 2001, p.32).
Arthur Denzau and Douglas North describe the cognition process in the following way:
“Categories-classifications gradually evolve from earlier childhood on in order to organize our perceptions and keep track of our memory of analytic results and experiences. Building on these categories we form mental models6 to explain and interpret the environment, typically in ways relevant to some goal(s). Both the categories and mental models will evolve to reflect the feedback derived from new experiences – feedback that may strengthen and confirm our initial categories and models or that may lead to modifications.” (1994, p. 224) These modifications can be of two types: changes in details concerning existing categories and changes of categories.
Denzau and Douglas use the term ‘representational redescription’ to characterise the latter type which is a reorganization of the categories and concepts7 with sudden shifts in viewpoints (1994, p. 225). To our mind the notion of representational redescription is very close to the notion of abduction of Peirce.
Peirce discovered a logic of science in which, in addition to deduction and induction, he considered the logical operation called abduction: “Abduction is the process of forming an explanatory hypothesis. It is the only logical operation, which introduces any new idea; (…) deduction merely evolves the necessary consequences of a pure hypothesis. (…) Abduction merely suggests that something may be. Its only justification is that from its suggestion deduction can draw a prediction which can be tested by induction and that, if we are ever to learn anything or to understand phenomena at all, it must be by abduction that this is to be brought about” (1903a, p. 216); “The abductive suggestion comes to us like a flash. It is an act of insight, although of extremely fallible insight. It is true that the different elements of the hypothesis were in our minds before; but it is the idea of putting together what we had never before dreamed of putting together which flashes the new suggestion before our contemplation” (1903b, p. 227). Peirce characterised his doctrine of Pragmatism as the true Logic of Abduction (1903a, p. 224).
Contrary to Cartesianism the Pragmatism attributed a modest role in human reasoning to deduction. The modern cognition science supports this position of Pragmatism. Cross-cultural
6“Mental model is a knowledge structure that represents information contained in the premises by relating it to available examples and real-life knowledge, leading to the formation of a possible conclusion.” (Sternberg and Ben- Zeev, 2001, p.370)
7 “Concept is a mental representation of a category or class of entities.” (Sternberg and Ben-Zeev, 2001, p.360)
“Concepts are useful because they promote a cognitive economy, expressing the maximum amount of essential information about a category with a minimum-length description.” (Sternberg and Ben-Zeev, 2001, p.32)
“Although categories and concepts tend to be treated synonymously, there is a case to be made for distinguishing between them. Concepts are implicated when we employ categorical information for purposes over and above deciding simple category membership (…) It is often assumed that concepts retain their core meaning as they re- occur in different contexts.” (Wilkes, 1997, p.36)
studies provided support for an approach which suggests that people do not engage in deductive reasoning in the real world. Instead, their judgements are based on categorisation and instances of a category are represented mentally by the degree by which they are similar to (have overlapping attributes with) an abstract representation of the category (Sternberg and Ben-Zeev, 2001, pp. 115, 374). It is abduction, an act of insight, sudden shifts in viewpoints with reorganization of the categories which is the central in human creative reasoning.
At present, many social scientists, especially economists, are convinced Cartesians. They think that cognition process in economic science is primarily deductive process and empirical work in this domain is not very much appreciated. The dominance of Cartesianism in economics can be explained in terms of Peirce’s investigating communities. Economic realities are very complex, determined to a large degree by cultural heritage but at the same time very dynamic. Knowledge concerning these realities for different countries, and even for different regions and different economic sectors inside the same countries, in different periods of time can hardly be presented on the basis of the same categories. It means that communication between members of the modern community of academic economists, which is to a great extent international, is difficult.
In this situation advantages of the creation of communities of academic economists on the basis of Cartesianism rather than Pragmatism are obvious. Cartesian approach creates unlimited possibilities for communicating inside the world community of academic economists on the basis of universal categories without much care about historical and geographical differences. In addition empirical work is very hard and apparently less pleasant than purely armchair
‘theoretical’ work. Douglas North underlines: “There is a lack of empirical work on the subject
<…> When Lee Alston, Thrain Eggertsson and I were working on a book of reading on empirical studies in new institutional economics, we had difficulty finding a sufficient number of case studies to use. The reason is that few have been done.” (North, 2000, pp. 8, 9) The most important cause of the crisis in mainstream economics is its remoteness of the actual economic activities.
Mainstream economics is also rooted in positivism. The founder of positivism, August Comte, professed to consider all phenomena as subject to “natural laws”. He saw the role of “positive science” in discovering these laws and the reduction to a minimum of their number (Comte, 1975). Neoclassical economics is in this sense a “positive science”. All generalisations of this economics were based on natural laws theory. In spite of the fact that a lot of rhetoric concerning the natural laws has disappeared from the discourse of the contemporary neoclassical thought, this economics is still founded on the epistemology based on the concept of these laws (Bush, 1993, p. 65). The positivism of 19th century, that of August Comte, has been altered in the middle of the 20th century in the logical empiricism, which is characterised by the hypothetico- deductive approach: “The first step in testing a scientific theory was to deduce certain empirical predictions from the theory and its initial conditions. The second step was to check these predictions against the observational evidence; if the empirical predictions turned out to be true, the theory was confirmed, and if these predictions turned out to be false, the theory was disconfirmed. In either case, it was not induction, but rather the deductive consequences of a scientific theory, that were relevant to its empirical support (…) Hypothetico-deductive method allowed scientific theories to be ‘based on’ empirical observations (deductively) without actually being ‘built up from’ those observations (inductively)” (Davis, Hands and Maki, 1998 p. 376). We can see here very clearly a manifestation of Cartesianism: “Cut off from observation as a source of truth, the Cartesian mind puts great on ‘testing’ to reaffirm its realism. But testing is not a guarantee of correct ideas because, having lost its mooring in reality, the economic mind has created so many conundrums, puzzles and purely mental constructs that testing proves everything and nothing.” (Mini, 1994, p. 41) Since Milton Friedman (1953) the neoclassical economics affiliates openly to positivism by adopting the hypothetico-deductive approach. The table below shows the difference between positivist and pragmatist paradigms.
Table 1. Basic characteristics of positivist and pragmatist paradigms
Positivist paradigm Pragmatist paradigm Basic assumptions The world is external and objective
The observer is independent Science is value free
The world is socially constructed and subjective
The observer is an integral part of what is observed
Science is moved by human interests
Basic
characteristics of research
Data presents objective facts Context is given a priori Sublimation of complexity Logic of verification
Data presents subjective meanings Context is apprehended a posteriori Taking into account of complexity Logic of discovery
The researcher must:
Elaborate concepts in such a way that they could be measured
Find causality links and fundamental laws
Reduce the phenomena to their simplest elements
Formulate hypotheses and test them
Elaborate concepts rooted in qualitative and quantitative data Try to understand the phenomenon under study
Observe every situation in its totality
Develop ideas by abduction from data
Source : (Usunier, Easterby-Smith and Thore, 2000, p. 37) and (Mucchielli, 1996, p. 197) adapted by the author.
Let me comment just one line in this table which is dealing with complexity. The founder of positivism, Auguste Comte, professed to simplify observed phenomena before explaining them.
Social sciences and in particular economics followed this positivist tradition. The scholars reduced phenomena under study to a certain number of quantitative variables or made a synthetic description before starting an analysis. In this way the positivist approach in general and the quantitative approach in particular sublime or deny the complexity of phenomena under study.
On the contrary the pragmatist approach in social sciences, associated with the qualitative research, does not reject the complexity but tries to manage it in the research process. This approach foresees rich and thick descriptions in order not to lose some crucial information.
These descriptions often take the form of quotations from interviews. The descriptions incorporated in an article or a book do not represent raw data but are chosen as significant. They are ranged according to the constructed categories and accompanied by comments. In this way they represent an important part of the reasoning and allow the readers to make their own judgements concerning results of the research.
The pragmatist philosophy of Charles S. Peirce according to his own words corresponds to the experimentalist’s mind (Peirce, 1905, pp.331, 332). An experimentalist “has had his mind molded in the laboratory (…) With intellects of widely different training from his own, whose education has largely been a thing learned out of books, he will never become inwardly intimate, be he on ever so familiar terms with them; for he and they are as oil and water, and though they be shaken up together, it is remarkable how quickly they will go their several mental ways, without having gained more than a faint flavor from the association” (Peirce, 1905, p.331). I am afraid that such an experimentalist’s type of person is quasi inexistent in the community of academic economists. The university education and training do not foster an interest to do field studies and even more this kind of studies are considered as something inappropriate for ‘highly qualified economists’. I can imagine that Table 1 above is absolutely indigestible for economists to whom ‘data’ are exclusively writings of other economists or statistical data at most. This table will leave them totally insensitive.
In June 2000 a group of French students of economics published an open letter to professors and other responsible for teaching of this discipline (Fullbrook, 2003, pp. 13 - 14). The first part of this letter was as follows: “Most of us have chosen to study economics so as to acquire a deep understanding of the economic phenomena with which the citizens of today are confronted. But the teaching that is offered, that is to say for the most part neoclassical theory or approaches derived from it, does not generally answer this expectation. Indeed, even when the theory legitimately detaches itself from contingencies in the first instance, it rarely carries out the necessary return to the facts. The empirical side (historical facts, functioning of institutions, study of the behaviors and strategies of the agents . . .) is almost nonexistent. Furthermore, this gap in the teaching, this disregard for concrete realities, poses an enormous problem for those who would like to render themselves useful to economic and social actors.” (p. 13) I believe that this is a very pragmatist declaration. The students requested practical knowledge for practical actions. The movement which was born after the French students revolt of teaching economics has received the name ‘the post-autistic economics movement’: “The main reason why the teaching of microeconomics (or of ‘microfoundations’ of macroeconomics) has been called
“autistic” is because it is increasingly impossible to discuss real-world economic questions with microeconomists - and with almost all neoclassical theorists. They are trapped in their system, and don’t in fact care about the outside world any more” (Guerrien, 2002). The autistic character of standard economics has deep philosophical roots in Cartesianism and positivism.
The dominance of positivist paradigm in economics makes it absolutely useless in the investigation of burning economic problems of the present. Many economists are not aware of and/or are indifferent to this situation. Of course there is a sizable and growing minority who do not subscribe to the neoclassical model or who reject the anti-scientific fundamentalism that surrounds it, but no means existed for mobilising them as a community (Fullbrook, 2003, p.2). In order to respond to the most important requirement of the open letter of French students, “We wish to escape from imaginary worlds!”, this community should be not only anti-neoclassical but, what is more important, it should be pragmatist. It means that the subject-matter of alternative economics should correspond to socio-economic reality which is the reality of beliefs and habits. It means also that the method of this economics should follow the logic of discovery and the elaboration of its concepts should be rooted in qualitative and quantitative data. The method should help to observe the situation in its totality with taking into account its complexity.
The method should be oriented not to creating sophisticated intellectual constructions but to understanding the phenomenon under study in order to help to solve real life problems. A set of methods of this type is called Qualitative Research.
2. Subject-matter of pragmatist institutional economics
The Pragmatism gives us the key for understanding social realities by indicating that they are beliefs and habits (rules). By defining the subject-matter of pragmatist institutional economics we have to be more precise. We must say what we mean by institutions, their relation to beliefs, and propose a scheme for analysis of economic activity in order to indicate the place of institutions and beliefs in this activity. On the basis of the definition of institution and the scheme of analysis of economic activity the subject-matter of pragmatist institutional economics can be defined.
The institution can be defined as typification of habitualised actions (Berger and Luckman, 1991, p.72). The literature on institutional economics contains a large number of definitions of institutions. May be the most condensed of them are the following: “The major role of institutions in a society is to reduce uncertainty by establishing a stable (but not necessary
efficient) structure to human interaction.” (North, 1990, p.6); “Institutions are durable systems of establishes and embedded social rules and conventions that structure social interactions”
(Hodgson, 2003, p.163). It is important to distinguish formal and informal rules and to know how they are enforced (North, 1990, 2003). Usually formal rules take the written form and the informal do not. Most of the institutions in modern societies are made up of both formal and informal rules8. In stable institutions informal rules complement formal ones. In emergent institutions earlier embedded informal rules can contradict to newly introduced formal rules and distort or even block their application. As we saw in the previous section of this paper, according to Pragmatism habits (rules) are closely linked, based on, beliefs. Similar to rules, the beliefs can be ‘formal’ and ‘informal’. ‘Formal’ beliefs are often depicted in documents of political parties and their more or less coherent sets represent ideologies. ‘Informal’ beliefs do not take a written form. Among beliefs it is important to distinguish ‘values’ which provide categorization in evaluative terms of ‘good’ and ‘bad’. Enforcement of rules is exercised by some human actions.
These actions in their turn follow some formal and informal rules. In considering only economic institutions the researcher is forced to include in his analysis ‘enforcement characteristics’ of these institutions (North, 1990, 2003). Nevertheless the enforcement dimension of the institutional analysis can be made by inclusion in this analysis of non-economic institutions9, for example, religious and political. As rules and beliefs, enforcement of rules can also be ‘formal’
and ‘informal’. The former represents the prosecution through the law system with a threat of penalties or imprisonment and the latter, for instance, takes the form of ‘public opinion’ with a threat of exclusion from a community.
Karl Polanyi distinguished two meanings of economic: substantive and formal10. Classical economics was defined as dealing with production, distribution and consumption of goods and services. This definition corresponds to the substantive meaning of economic. Neoclassical economics switched to its formal meaning of economic. Polanyi gave a substantive definition of economic in institutional terms: “It can be briefly (if not engagingly) defined as an instituted process of interaction between man and his environment, which results in a continuous supply of want satisfying material means” (Polanyi, 1957, p. 34). Economic activity, as the flow of economic actions, in its substantive meaning, can be analysed at four levels.
Table 2: Scheme for analysis of economic activity11
No Level of analysis Analysed units Links between analysed units
1 Cognitive Beliefs Complementarity/contradiction
2 Institutional Rules Complementarity/contradiction
3 Organisational Decision-making centres Power relations
4 Technological Resource processing units Material/informational flows There are top-down links between these four levels. Beliefs determine the rules in the framework of which power relations took place between decision-making centres. Decision making centres
8 In modern societies purely informal institutions, rules of which are exclusively informal, are marginal.
9“The human economy is embedded and enmeshed in institutions, economic and noneconomic. The inclusion of the noneconomic is vital. For religion or government may be as important for the structure and functioning of the economy as monetary institutions or the availability of tools and machines themselves that lighten the toil of labour”
(Polanyi, 1957, p. 36).
10 “The two root meanings of ‘economic’, the substantive and the formal, have nothing in common. The latter derives from logic, the former from fact. The formal meaning implies a set of rules referring to choice between the alternative uses of insufficient means. The substantive meaning implies neither choice nor insufficiency of means (…) The fount of the substantive meaning is the empirical economy” (Polanyi, 1957, p. 31, 36).
11 Previous versions of this scheme were published in Yefimov (1981, 1988, 1997, 2001). This scheme has some similarities with that of Williamson (2000).
determine the functioning of resource processing units and control material and informational flows between them. There are also down-up feedbacks between levels. Technological level provide signals to organisational level to make possible correct decision-making. Different natural and juridical persons (decision making centres) using their power try to change rules in their favour. Finally, problems emerging in the functioning of decision-making centres in the framework of existing rules push them to change their beliefs. The choice of level for analysis of economic activity depends of the objective of the study. If the researcher is concerned with the result of economic activity at particular moments, then major attention is likely to be devoted to the technological level. On the contrary, if the researcher is concerned not with the end result of economic activity but with its mechanism operating in a certain period of time then his attention should be devoted to organisational and institutional levels. Furthermore if he is concerned with changes in the mechanism of economic activity then undoubtedly the main attention should be focused on institutional and cognitive levels (Yefimov, 1981, p. 190).
Neoclassical economics ignores levels 1 and 2, and level 3 is present in neoclassical analysis in a very simplified form with poor collection of decision-making centres and neglect of power relations. The stress in this analysis is made on level 4. On the contrary, pragmatist institutional economics should put level 2 in the centre of its studies supported by analysis of levels 1 and 3.
If the research is oriented to the analysis of institutional functioning, level 2 plays an important role. If the objective of the research is institutional change, then the analysis at level 1 becomes crucial. In the framework of pragmatist institutional economics, quantitative analysis of material flows (level 4) can serve only for asking questions and answers to these questions should be found at higher levels (Yefimov, 2001, pp. 30 - 31).
By summing up what was said above, we can define the subject-matter of pragmatist institutional economics in the following way: pragmatist institutional economics studies economic activity by analysing functioning and change of institutions that structure economic activity. Analysis of functioning of institutions requires the taking in account of power relations between actors. The study of institutional change demands an analysis of beliefs/ideologies shared by different types of actors. Briefly, we can say that subject-matter of pragmatist institutional economics is sets of institutions, in which the human economy is embedded and enmeshed. In other words, the pragmatist institutional economics investigates typification of habitualised economic actions and beliefs linked with these actions. These typifications could take the form of formal rules (laws and written regulations) and informal rules (customs and traditions). In modern societies beliefs often take the form of ideologies. Pragmatist institutional economics is sharply different from neoclassical mainstream economics by subject-matter which for the former derives from the substantive meaning of economic and for the latter – from the formal one. I believe that this understanding of the subject-matter of pragmatist institutional economics corresponds to that of John Commons: “Peirce’s pragmatism, applied to institutional economics, is the scientific investigation of economic relations of citizens to citizens. Its subject-matter is the whole concern of which the individuals are members, and the activities investigated are their transactions governed not by a law of nature but a working rule, for time being, of collective action”
(Commons, 1934a, p.157). The 2003 Conference of the International Society for New Institutional Economics had more than half of papers (Joskow, 2003) concerning levels 1 and 2 of Table 2, from where we can conclude that many neoinstitutional economists are not just
‘transaction costs’ economists12.
12 “(…) neoinstitutionalists scholars do not speak with one voice and the boundaries of the field have not being established with any great precision. (…) there are major disagreements among scholars about how best to treat institutional and organizational questions in economics (…) For most economists operating in the postwar period, there was something very satisfying about the notion that a straightforward transition could be made to a more flexible, institutionally oriented theory by simply changing certain neoclassical assumptions while holding others unchanged. The procedure seemed to promise the best of all outcomes. By following this approach, the NIE could
3. Method of pragmatist institutional economics
Pragmatist institutional economics differs from neoclassical mainstream economics not only by the subject-matter but also by its method. Generally speaking the method of pragmatiые institutional economics is Pragmatism of Charles Peirce. Pragmatism as a method of research corresponds to the reality of human cognition studied by the cognition science and Cartesianism/positivism with its hypothetico-deductive method does not. Descartes distinguished sharply processes of cognition of layman and processes of cognition of scientist. The Pragmatism of Charles Peirce eliminates this sharpness. Why they would be different? Laymen and scientists belong to the same specie of human beings and their brains are constructed in the same way. The modern cognition science gives a model of human behaviour (homo cogitans) and at the same time a method of scientific research, a method corresponding to the human nature. This model/method consists in the categorisation and creation on their basis of mental models in the every day life and in the research practice. In both cases the categories/concepts and mental models are shared inside certain communities: “The world is too complex for a single individual to learn directly how it all works. The entire structure of the mental models is derived from the experiences of each individual – experiences that are specific to the local physical environment and the socio-cultural linguistic environment (…) In fact, no two individuals have exactly the same experiences and accordingly each individual has to some degree unique perceptions of the world. Their mental models would tend to diverge for this reason if there were not ongoing communication with other individuals with a similar cultural background” (Denzau and North, 1994, pp. 225-226).
However some differences between cognition activities of laymen and scientists do exist and
“the crucial difference [is] created by the attempt in science to maintain the precision in terms as opposed to their plasticity in a popularly held and communicated mental models, Kuhn argues, the relatively precise nature of concepts helps keep a paradigm or conceptual framework almost fixed for long periods” (Ibid., pp. 235-236). The process of accommodation and change in shared mental models does not always progress smoothly or easily. Ideological purists try to resist any change (Ibid., p. 226). In this way, professionalization of scientists can play a negative role in knowledge acquisition process, especially after the strong institutionalisation of science. This happens in situations of a weak social (democratic) control or too strong social (authoritarian) control from outside of scientific communities on the activities of scientists from the point of view of the quality of knowledge they acquire and hold. Science in general and economics in particular is a set of institutions which could be analysed on the basis of four level scheme exposed in Table 2. Rules of recruitment, promotion, publication etc. are an evolutionary result of ideological, political and financial influences from outside and inside of scientific communities and of their shared mental models too.
presumably expand understanding of institutional questions while simultaneously preserving the rigor of the deductive neoclassical model. Moreover, extension of the neoclassical model permitted continued use of the standard technical tools that were part of the neoclassical legacy. Under these terms, research could be conducted more or less as usual. In particular, there was no need to engage in the kind of massive historical-descriptive studies that were associated with the old institutionalism. Rather, modern empirical and econometric work could be undertaken (…) the approach initially taken by most NIE scholars, with its heavy reliance on neoclassical perspectives, had the effect of oversimplifying problems and often of moving discussion on less productive directions (…) as neoinstituionalist thinking matured, some writers began to challenge NIE works whose methodology did not depart very far from neoclassical orthodoxy (…) speculation arises about whether (…) a shift must be made to a fundamentally different paradigm. Serious controversy still surrounds this issue, and the debate has by no means settled” (Furubotn and Richter, 1998, pp. 435 – 438).
John Commons accepted the term Pragmatism proposed by Peirce as the name of the method of investigation he applied to economics: “We compelled to distinguish and use two meanings of pragmatism: Peirce’s meaning of purely a method of scientific investigation, derived by him from the physical sciences but applicable also to our economic transactions and concerns; and the meaning of the various social-philosophies) assumed by the parties themselves who participate in these transactions. We therefore, under the latter meaning, follow most closely the social pragmatism of Dewey; while in our method of investigation we follow the pragmatism of Peirce. One is scientific pragmatism – a method of investigation – the other is the pragmatism of human beings – the subject-matter of the science of economics.” (Commons, 1934a, pp.150, 151) This method supposes an experimental approach to investigation, that is the direct contact with investigated subject-matter, i.e. institutions and beliefs which accompany them. This direct contact can be achieved by the investigator through studies of different documents, including texts of formal rules (laws and regulations), use of action research, participant observation, interviews and case studies13. All these techniques should withdraw the cognitive gap between scholars and actors and in some way enlarge ‘learning communities’ by partial inclusion in them of actors. In order to catch meanings of observed events and understand informal rules, participant observations should include active interviews, which could take the form of
“brainstorming” sessions. The pragmatist methodology rejects an objectivity based on value free neutrality of the researcher and proposes a solution to the problem of subject-object relation in social inquiry.
Pragmatist methodology of social research was developed by the Chicago sociological school14 in the framework of Symbolic Interactionism. The author of this term wrote: “No theorizing, however ingenious, and no observance of scientific protocol, however meticulous, are substitutes for developing a familiarity with what is actually going on in the sphere of life under study”
(Blumer, 1969, p.39); “We must say in all honesty that the research scholar in the social sciences who undertakes to study a given sphere of social life that he does not know at first hand will fashion a picture of that sphere in terms of pre-established images (…) [In the framework of usual research practices] in place of being tested and modified by firsthand acquaintance with the sphere of life they [pre-established images] become a substitute for such acquaintance. (…) There is no demand on the research scholar to do a lot of free exploration in the area, getting close to the people involved in it, seeing it in a variety of situations they meet, noting their problems and observing how they handle them, being party of their conversations, and watching their life as it flows along. In place of such exploration and flexible pursuit of intimate contact with what is going on, reliance is put on starting with a theory or model, posing a problem in terms of the model, setting a hypothesis with regard to the problem, outlining a mode of inquiry to test that hypotheses, using standardized instruments to get precise data, and so forth” (Blumer, 1969, pp. 36 - 37). The last sentence of this quotation describes exactly in what way most of the economists do empirical research. This positivist methodology for economics was formulated by Milton Friedman (1953): “A theory is the way we perceive ‘facts’, and we cannot perceive
‘facts’ without a theory” (p. 34).
Unfortunately not only neoclassical economists share these Friedman’s views. Geoffrey Hodgson who is one of the very active authors with ‘institutionalist label’ confessed: “Contrary to many institutionalist writers, the epistemological position here is strongly anti-empiricist”
(Hodgson, 1988, p. 24). He criticised Friedman not for his Cartesian positivism but on the basis
13 John Commons called interviewing “the prime method of investigation” (1934a, p.106). He practised extensively case studies of the past, for example the Slaughter House Cases (1924, pp. 47 - 54), and of the present. The latter was investigated by him as a member of the Wisconsin State Industrial Commission (1934b, pp. 142, 143). He wrote: “Academic teaching is merely brains without experience. The ‘practical’ extreme is experience without brains. One is half-baked philosophy – the other is rule-of-thumb.” (1934c, p.160)
14 The most famous works of this school (Thomas and Znaniecki, 1926) was based on the life history method.
of this ‘strongly anti-empiricist’ position (Hodgson, 1988, pp. 28 - 35). I think that Hodgson is even more Cartesian15 than Friedman. Let us discuss his ‘anti-empiricists’ arguments, which are indeed pro-Cartesian arguments: “The key criticism of empiricist epistemology (…) is that no observation can be independent of the conceptual framework, language and theoretical system of the observer. Consequently, no ‘objective’ facts can be known untainted by the preconceptions of the investigator” (1988, p. 35). The pragmatist approach does not exclude that the researcher coming to the field has some preconceptions or pre-established images, but what the pragmatist approach excludes is determining by them the gathering of data. For example, in 1998 I had an occasion to attend a meeting of heads of collective farms of a district Administration in Russia.
During this meeting I had the feeling that we were still somewhere in 1978. In 1999 I started an inquiry in the Russian countryside, having the preconception of the agrarian institutional continuity in post-Soviet Russia, but the questionnaires for this inquiry were elaborated not in the framework of this preconception. These questionnaires (Yefimov, 2003, pp. 375 – 377) served as guides for talks with different actors with the objective not to test this idea but to understand what was going on in different kinds of farms, companies and administrations.
The statement “All facts are expressed in some form of language, and an aconceptual or atheoretical language is impossible” (Hodgson, 1988, p. 35) is a sophism because of the use of undefined here notions of ‘theory’ and ‘language’. ‘Theories’ and ‘languages’ can be of different levels. The statement is true if the notions of ‘language’ and ‘theory’ are used in the sense of categories and mental models shared in a certain socio-cultural linguistic environment which can be very large. For example, if the area under study was the Russian countryside, then knowledge of Russian language including technical agricultural terms would be sufficient to begin
‘observation’, i.e. “getting close to the people involved in it, seeing it in a variety of situations they meet, noting their problems and observing how they handle them, being party of their conversations, and watching their life as it flows along”. At the same time the statement of Hodgson is false if the notions of ‘language’ and ‘theory’ are used in the sense of categories and models/theories/hypotheses shared by a certain community of scholars. For example, gathering data concerning preconceived variables, quantitative or qualitative, of a theory and escaping any other information, which could be collected in the field if it does not enter in this set of preconceived variables, will make investigator ‘blind’ to many possible insights. In the case of using low level categories and mental models shared by actors of the area under study the scholar has a possibility to make a discovery and to reconsider his pre-established image of the area under study by developing his own new categories and mental models. In the case of using high level categories and models/theories/hypotheses shared by members of a certain scientific community the scholar is condemned to be prisoner of his preconceived variables. He is unable to discover in the field something outside of his a priori model/theory/hypothesis and what he can do only to ‘test’ this a priori model/theory/hypothesis.
Geoffrey Hodgson is right by saying that “we cannot ever gain a more accurate or adequate understanding of economic reality exclusively by observation and the gathering of data”. And it is true not because “contrary to empiricist view, science cannot progress without a theoretical framework, and no observation of reality is free of theories or concepts” but because understanding of economic reality can progress only through ‘representational redescription’, i.e.
the correction or even total change of categories/concepts and models/theories constructed on the basis or emerged from observation and gathering of data. I agree with professor Hodgson when, following the sociology of science, he said that “science is a social activity and its development involves the social generation, scrutinization and acceptance or rejection of theories, procedures and norms. Consequently, science can never be ‘neutral’ in the sense that it is entirely free of the
15 The Cartesian position of Geoffrey Hodgson is very sharply expressed in his understanding of “the residual importance of evidence (1988, p. 47).
biases and preoccupations of society and the scientific community.” (1988, p.36) But this true statement does not transform his sophism in a true statement.
A close and reasonably full familiarity with the area of life under study is essential to any social researcher (Blumer, 1969, p. 37). A set of methods based on pragmatist methodology which allow to get this familiarity with area of life under study has received the appellation of Qualitative Research. The methods included in this set can be classified as follows: basic or generic qualitative research, ethnographic study, case study, life story method, phenomenological study, grounded theory and action research. The two latter methods will be discussed in sections 4 and 5 of this paper. Below in this section we will characterise briefly general features of qualitative research methods in general. All qualitative research methods use as sources of information existing texts, semi-directive interviews and participant observation.
Institutional economists should pay special attention to juridical (laws and regulations) and political (programmes of parties and associations and declarations of political leaders) texts. The former reflect formal rules and the latter existing beliefs. In order to collect information on the informal rules and shared beliefs, including values, the researcher should use semi-directive interviews and participant observation16. Data on habits and beliefs can hardly be numerical.
That is why methods used in the framework of the pragmatist paradigm are primarily qualitative.
This paradigm integrates the observer and the observed in the procedures of observation. It is attentive to find meanings of actions of the concerned actors. In the framework of this paradigm the researcher takes into consideration the complexity of the situation under study and intentions, motivations, expectations, reasoning, beliefs and values of actors (Mucchielli, 1996, p. 34).
Qualitative research can analyse data at several levels: “At the most basic level, data are organized chronologically or sometimes topically and presented in a narrative that is largely, if not wholly, descriptive17. Moving from concrete description of observable data to a somewhat more abstract level involves using concepts to describe phenomena (…) This is the process of systematically classifying data into some sort of schema consisting of categories, themes or types. The categories describe the data, but to some extent they also interpret the data. A third level of analysis involves making inferences, developing models, or generating theory.”
(Merriam, 2001, p. 187) Some categories can be of similarity-based type when the others are of explanation-based type. The process of qualitative research can be characterised as a progressive move from actors’ meaning to researcher’s meaning (sense).
The most important characteristics of qualitative research are the following (Merriam, 2001, pp. 6-8, 61):
1) Qualitative researchers are interested in understanding the meanings people have constructed, that is, how they make sense of their world and the experiences they have in the world. It is assumed that meaning is embedded in people’s experiences and that the meaning is mediated through the investigator’s own perceptions. The key concern is understanding the phenomenon of interest from the participants’ perspectives, not the researcher’s.
2) Qualitative researcher uses his data not to answer questions like how much or how often but to discover what occurs, the implications of what occurs, and the relationships linking occurrences. In this case his sample has not to be large and random but has to correspond to this purpose. Purposeful sampling serves to the investigator to discover, understand, and gain insight and therefore he must select a sample from which the most can be
16 “Because rule structures cannot be comprehended by external detached observation, economists must self- consciously engage in participant observation.” (Mirowski, 1987, p. 1020)
17“Data are compressed and linked together in a narrative that conveys the meaning the researcher has derived from studying the phenomenon. While description is an important component of all forms of qualitative research, few studies are limited to this level of analysis.” (Merriam, 2001, pp. 178-179).
learned. The size of the sample can be determined gradually: sampling continues until a point of saturation is reached, i.e. no new information is forthcoming from new sampled units.
3) The researcher is the primary instrument for data collection and analysis. It determines by a creative character of communication with actors and abductive nature of data analysis (insights).
4) Qualitative research usually involves fieldwork. An occasional qualitative study could be undertaken using documents alone, but these are exceptions.
5) The product of a qualitative research is richly descriptive.
Table 3 displays a comparison of characteristics of qualitative research with the more familiar positivist-quantitative approach. The dichotomy indicated in this table does not exclude the use of quantitative methods in the framework of a qualitative research.
Table 3. Characteristics of quantitative and qualitative research
Points of comparison
Quantitative Research Qualitative Research Philosophical
roots
Cartesianism, positivism
Pragmatism, phenomenology Goal of
investigation
Prediction, confirmation, hypothesis testing
Understanding, description, discovery, meaning, hypothesis generation Design Predetermined, structured Flexible, evolving, emergent Sample Large, random, representative Small, non-random, purposeful Data collection Inanimate instruments (statistical
data, surveys, questionnaires)
Researcher as primary instrument, semi- directive interviews, observations, documents
Mode of analyses
Deductive and inductive (by statistical method)
Abductive (by researcher)
Findings Precise, numerical Comprehensive, holistic, expansive, richly descriptive
Source: (Merriam, 2001, p.9) adapted by the author.
4. Theorising in pragmatist institutional economics
The pragmatist institutional economics was founded by John R. Commons. The school of thought launched by him is often accused to create no theories as neo-classical economists do18. Mainstream economists try in vain to find in texts of institutionalists deductive theories based on a priori axioms: “The institutionalists seem to have suffered from a methodological confusion regarding the nature of theory. They thought a description was a theory.” (Ward, 1966, p. 187);
“Theory was never Commons’s metier. When he calls his ‘theories’ are exclusively poorly wrought and somewhat lackadaisical classifications and sub-classifications of phenomena as they appear to him from the dimly held and mainly intuitive conception impossible to define.”
(Seckler, 1975, p 124) [quoted by Yngve Ramstad (1986), p. 1098]. Geoffrey Hodgson who has the Cartesian vision of institutional economics has been trapped in the same way: “Commons did not have the statute of a major theorist such as Alfred Marshall or Karl Marx. Furthermore, he did not have the aptitude for careful definitions or logical chains of reasoning” (Hodgson, 2003, p. 548). John Commons spoke about theorizing in the Max Weber’s sense: “[The Weber’s contribution] converts the whole process of theorizing from a ‘theory’, in the older sense of the
18 See for example the section on American institutionalism of the book of Mark Blaug (1985).
logical consistency of reality, to the mere methodology of constructing intellectual tools to be used in investigation. There is no longer a question of antagonism between theory and practice, for a theory is a tool for investigating practice.” (1934a, p. 722) Commons underlines that the
“search for the meaning of human activities can never be expected to yield an ‘exact’ science, or even an approximation to the quantitative requirements of other sciences. Yet that is not wanted, anyhow. What the economist wants is understanding, and he wants measurement only as an aid to understanding” (1934a, p.723).
The discussion in section 3 of this paper of militant Cartesian position of Geoffrey Hodgson makes here unnecessary a critical assessment of his following statement: “In the interwar period institutionalism was actually the dominant school of economic thought in the US. It lost ground to neoclassical formalism partly because it neglected its own task of underlying theoretical development. It is not difficult to see how institutionalism became bogged down. After establishing the importance of institutions, routines and habits, it underlined the value of largely descriptive work on the nature and function of politico-economic institutions. Whilst this was of value it became the predominant and almost exclusive practice of institutionalist writers. The institutionalists became data-gatherers par excellence. The error here was largely methodological and epistemological, and committed by many institutionalists with the exception of Veblen himself and few others. It was a crucial mistake simply to clamour for descriptive ‘realism’, by gathering more and more data, or by painting a more and more detailed picture of particular economic institutions.” (Hodgson, 1988, pp. 21 – 22)
It is true that pragmatist roots of original (old) institutional economics prevented the creation of context-free, a-historical, theoretical purely deductive constructions. This is not a handicap of pragmatist institutional economic theories not to be deductive but abductive, but this is their important cognitive advantage. I believe that Polanyi meant this kind of theory to deal with substantive concept of economic which derives from fact unlike the formal concept of economic which derives from logic (1957, p. 31). Theorising in pragmatist institutional economics can be nothing else than a creation of sets of concepts with their interrelations coming from “a close and reasonably full familiarity with the area of life under study”. These concepts must be deeply rooted (grounded) in the data gathered about rules and shared meanings. Most of this data can be collected exclusively through direct contacts with actors. As we underlined in the first section of this paper, economic realities are very complex, determined to a large degree by cultural heritage but at the same time very dynamic. Knowledge concerning these realities for different countries, and even for different regions and different economic sectors inside the same countries, in different periods of time can hardly be presented on the basis of the same categories/concepts.
Complexity, cultural diversity and dynamics of economic realities have as a consequence the impossibility of creation of theories useful for political and economic actors covering all these realities. That is why pragmatist institutional economics is determined as a discipline only by its subject-matter, method and very general key concepts like belief, habit, ideology, institution and some others. For most of the investigations other created concepts are inevitably contextual.
Special guidelines for producing this kind of theories were called Grounded Theory methodology (Glaser and Straus, 1967; Strauss, 1987; Strauss and Corbin, 1998; Dey, 1999;
Locke, 2001). Grounded theory was defined by its elaborators as a discovery of theory from data (Glaser & Strauss, 1967, p.1). Grounded theory methodology is a continuation of methodology of symbolic interactionism and is the most sophisticated version of qualitative research.
According to this methodology, a theory must be generated not in an armchair but in the field.
The process of data collection and the generation of a theory are not totally separated. The investigator collects documents and contacts actors to get data for analysis. He/she tries to set aside theoretical ideas during data collection and initial stages of their analysis. He/she does it
“in order to assure that the emergence of categories will not be contaminated by concepts more
